Gold to go only one way from here... Up!

(Nov 13, 2009)

In this issue:
» India lags far behind China in FDI inflows
» Where is it the hardest to make a living legally? Guess...
» Rs 500 bn may move out from FDs into other assets
» Finally, some growth in air passenger traffic
» ...and more!

Has the moment of truth arrived for gold prices? Are we staring at structurally high gold prices from now on till forever in the future? If the recent actions of the world's top producer of gold is any indication, you cannot help but answer in the positive to both the above questions. As per reports, Barrick Gold, the world's largest producer of gold is moving fast to completely close its hedging operations as it does not believe that gold prices could fall a great deal from here. Perhaps, the decision has a lot to do with a statement from the company's president recently that global output has been falling by roughly 1 m ounces a year (approx 33 tonnes) since the start of the decade and hence, there is a strong case to be made that we are already at 'peak' gold. And with central banks around the world also turning into net buyers of gold in recent times, supply crunch is likely to worsen a great deal more, taking gold prices even higher.

Barrick was not the only one betting on much higher floor for gold prices in the future. Marc Faber, one of the world's pre-eminent investors has also jumped on to the bandwagon. "We will not see less than the US$ 1,000 level again", he is believed to have said at a conference today in London. "Central banks are all the same. They are printers. Gold is maybe cheaper today than in 2001, given the interest rates. You have to own physical gold", the maverick investor further added.

We are of the opinion that while the case for gold looks very strong indeed, this does not mean that there is absolutely no likelihood of the yellow metal going below US$ 1,000 per ounce. For that matter, even the dollar can rally enormously from the current levels. However, the odds that both these scenarios will happen in the near to medium term is certainly on the lower side. So, while having gold in your portfolio does make sense, one should refrain from going overboard with it.

01:20

Chart of the day

For all the comparisons between India and China that do the rounds, this one goes hands down to China without as much as a fight. Today's chart of the day shows just how far India is when it comes to attracting foreign long-term capital investments from the rest of the world when compared to its aggressive neighbour. Foreign direct investments (FDI) are those investments that foreigners make in a country to build a business in that country. In entails investments in physical assets such a plant, machinery and buildings for that purpose.

What's most striking about this comparison is that the quantum of FDI flowing into India in the year 2008 (US$ 35 bn) was breached by China way back in 1995! While the Indian government has in the last few years been taking steps to attract foreign long term capital, it has clearly not been enough when seen from this perspective.

Source: Asian Development Bank

01:58

For investors, fixed deposits as an investment alternative are beginning to appear passe. This spells good news for mutual funds, banks and companies who are competing with each other to pocket investible funds that are beginning to move out of these FDs. These funds are to the tune of Rs 500 bn. Exactly a year ago, the scenario was reverse. After Lehman collapsed, interest in stockmarkets and mutual funds considerably waned. Investors then in a bid to shun risk parked their funds in fixed deposits on which banks then were paying high interest rates in the range of 10-11% over a period of 1-3 years. Interest rates have now dropped and are anywhere between 5.2% and 7% pre-tax taking the sheen off FDs. Thus, investors are now once again seeking attractive investment opportunities.

Given that stockmarkets have rallied considerably and appear stretched at the current levels, it is perceived that money will not really flow into equity mutual funds and stocks but into corporate FDs that offer at least 2-3 percentage points higher than the rates offered by bank FDs. At the end of the day, what will determine the flow of money into various asset classes will be the risk appetite of investors.

02:46

Ethics is a virtue that has been perceived to be absent amongst the financial investment and trading community in the US, particularly after the blow that it dealt to an otherwise benign global financial system. Obscene short term performance-linked compensations induced the greed for better P&L performance, irrespective of the level of underlying risk. The result was for all to see when the burst of the housing bubble had a multiplied and rippling effect on all other asset classes.

Ms. Alice Schroeder, the author of 'The Snowball: Warren Buffett and the Business of Life' writes in a Bloomberg column, "Wall Street has many decent, honorable people, but they work in a system that fundamentally compromises people's ethics. The high pay is like an anesthetic that numbs you from feeling how you are being corrupted. Not only that, many honest people who work there would agree with an even more extreme statement: It's hard to make a living legally on Wall Street." While one would be compelled to believe that given the determination of Wall Street giants to once again dole out big bonuses, we are hopeful that the honest individuals there would make it a point to transform their organizations into ethical ones.

Meanwhile we also hope that the financial investment and trading community in our own country is taking home some important lessons.

03:40

In an environment marked by apprehension about the future movement of stock markets, Ken Fisher, the renowned money manager appears to be very bullish about the US stocks. He opines that the current rally that replaced the huge bear market witnessed during the downturn is here to stay as excessive pessimism has given way to new found optimism about the decent pace of economic recovery.

According to him, this bull run will be led by economically sensitive sectors like raw-material producers, discretionary consumer companies and industrials. Other experts too second his view as they too believe that stocks are finding favour in an environment with zero-inflation, zero percent interest rates and zero percent money market rates. What's more, they believe that the current run-up is far from a stock market bubble as this time the prevailing mood is one of optimistic caution and not of irrational exuberance.

04:14

Even better times for India may be just around the corner. Atleast that's what the data on growth in domestic air passenger traffic seems to suggest. While the growth in air passenger traffic has been 25% YoY during the month of October, compared to September this year the growth has been 11%. The increase signals higher levels of business and non-business travelers, a welcome sign of growing activity in the economy.

04:22

Though the Indian stockmarkets had a volatile trading session today the major indices managed to hold on to their gains until the time of this writing. While the BSE-Sensex was trading higher by about 200 points, consumer durable and realty stocks were the only two sectors seeing overall declines. Asian markets closed mixed today. Europe too began the day on a mixed note.

04:43

Today's investing mantra

"Price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to...the operating results of his companies." - Ben Graham

The 5 Minute WrapUp Premium is now Live!

A brand new initiative of Equitymaster, this is the Premium version of our daily e-newsletter The 5 Minute WrapUp.

Join us in this journey to uncover the sensible way of managing money and identifying investment opportunities across various asset classes including Stocks, Gold, Fixed Deposits... that over time can help you realize your life's goals...

its true that it will touch $2000 an ounce in the near
future its only the safe bet in the Dubai fancy and
natural correcction has taken place for the rich to
teach them a lesson to make a differnce between haves
and havenots

Its true that it will go only one way up in the near
future with out any break, after the recessionary
trends prevaining in the world, its the safe mode and
one can do it easily and the demand supply and
perceptions of the people at large, and India occupied
major buyer sentimally, every one will join like real
estate boom, no stocks are good in near future with
clear direction, investment flow is good and surplus
available, it will touch $1500 an ounce in the near
future I am not so sure it will touch 2000 but it will
take time, if you see the time prospective of five
year term from 1970 it had a jump of 36%to 65% in a 5
year term, so safe to keep in gold, its equate with
time

I opine FIIs are the dictators of the markets.Our MF industry equity base and investments by insurance companies can not deter market valatality in near future.If FIIS INVEST MARKET GOES UP AND GOES DOWN IF THEY SELL.OUR CITIZENS ARE HABITUATED TO SAVE IN DEBT LIKE INSTERUNENTS.Please be always watchful.

Long Term data for last 18 Years reveals that Gold has generated returns in the range of 11%-12% p.a. Although this is not better than equity returns, it is certainly better than returns from FDs and other Fixed Income Instruments. I would therefore recommend to shift the money from FDs to Gold ETFs, over next 3-5 years with under an SIP system.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.